Canada’s unemployment is lower than we think

July 22, 2014

The unemployment rate is perhaps the most widely cited measure of labour market conditions and thus one of the chief indicators of economic prosperity. The official unemployment rates as published by the US Bureau of Labor Statistics and Statistics Canada, and discussed upon in the news, have seen in recent months a rising gap between Canada and the US, its key economic peer.

In May 2014, unemployment in Canada rose to 7 percent, while the US unemployment rate remained stable at 6.3 percent. The apparent gap between Canada and the United States’ unemployment rates has generated widespread concern in the media and among economists. However, this gap may be misleading, as much of this discrepancy is due to different measurement techniques employed by Canada and the US. When the unemployment rate is measured in a comparable manner, this gap between Canada and the US disappears, indicating that the Canadian unemployment rate is in fact on par with the American rate.

The primary reason for the statistical inconsistency is that while Canada and the US both follow the same guidelines determined by the International Labour Office (ILO) for measuring unemployment, certain aspects of it are interpreted and implemented differently, particularly in regard to the treatment of passive job seekers. According to the ILO definition, in order to be considered unemployed, someone has to take “specific steps in a specified recent period to seek paid employment or self-employment.”[1] Canada and the US interpret these “specific steps” differently.

To be classified as unemployed in the United States, one must take actions which are proactive and have real possibility of getting a job offer, including placing an ad offering services or answering an ad, sending applications, and visiting employment agencies. Contrastingly, in Canada, a passive search is sufficient, and one can merely be gathering information or looking at job ads. This distinction between active and passive search is far from negligible and contributes to a higher official unemployment rate in Canada.

Statistics Canada has investigated the discrepancy between the Canadian and American unemployment measurements, and has produced an alternative Canadian unemployment rate adjusted to the US methodology entitled R3. The R3 figure is approximately one percentage point lower than the official Canadian rate, and is often overlooked by the media[2] when making cross-country comparisons. When excluding passive job seekers from the labour force, the unemployment gap between the two countries narrows significantly. This suggests that the Canadian labour market might be in better shape than conventional figures suggest, at least in comparison to the US.

Despite the existence of alternative employment measurements, such as unemployment duration, number of involuntary part time workers, and number of discouraged workers, the unemployment rate remains the most authoritative statistic used by policy makers to shape their decisions. The frequent usage of official published rates which are not directly comparable puts us at the risk of wrongfully assessing the state of our labour market. Expanding the use of R3 will enable decision makers to truly capture the extent of underutilization in the labour market and help policy makers take the necessary steps to bring Canada closer to the prosperity level of its peers.